Public investment, private investment, foreign direct investment and economic growth in vietnam further evidence at the provincial level

EmpiricalStudies SumeiTa ng,E .A... Datafromthefollowingsources: -GrossdomesticproductGDPofprovincesandcitiesintheperiod2007- 2014istakenaccordingtotheactualvalue,measuredinVNDbillionat

PhamDinhLong&LeNguyenQuynhPhuon g|1

Publicinvestment,privateinvestm ent,foreign directinvestmentand economicgrowthinVietnam:

2014.A p p l y i n g thePVARmodelinconsideringtherelationsbetweent hesevariables,weprovidemoree m p i r i c a l evidenceontheimpactso fdifferenttypes ofinvestmentsonthelocaleconomicg r o w t h of63prov incesinVietnam.

i n g d o m e s t i c investment( i n c l u d i n g t h e p u b l i c i n v e s t m e n t ,

p r i v a t e i n v e s t m e n t ) , f o r e i g n d i r e c t i nv es t m e nt , andmostofallinthecountries.Domesticinvestment(DI)hasalwaysbeenseen

a s a m a j o r c o n t r i b u t o r tot h e n a t i o n ' s e c o n o m i c g r o w t hespeciallyi n t e r m o f

creatingjobsf o r t h e e c o n o m y F o r e i g n d i r e c t i n v e s t m e n t( F D I ) p l a y s a k e y r o l e i n boosti ng theeconomy,contributingsignificantlytotheeconomicgrowthofcountriesingeneral.

Developingcountriesintheworld,aswellasVietnam,arefacingissuesofattraction,m a n a g e m e n t , a n d u s e o fi n v e s t m e n t source

st h a t haven o t b e e n effectivei n r e c e n t yea rs V i e t n a m h a s a

c c e s s t o s t a t e b u d g e t f u n d s , e n c o u r a g e d i n sectorprivateinvestmentaswellasforeigndirectinvestmentfrommultinationalcompanies,whichisexpectedto m a k e a po s i ti ve c h a n ge in pr om o ti n

g e c onom ic gr ow th H o w e v e r , in th e localcontext,itisnottheexploitationoftheseresourcesthatisthesame,dependingonthecharacteristicsofeachregion,thepoliciesandwaysofusingthesourcesofi n

v e s t m e n t o f m a n a g e r s a r e d i ff e r e n t A l l o f t h e s e f a c t o r s c o

n t r i b u t e t o c h a n g i n g t h e impactofinvestmentonlocaleconomicgrowth

Therefore,thepaperwillanalyzethecurrentstatusandquantificationofthecausalr e l a t i o n s h i p betweenpublicinvestment,privateinvestment,foreigndirectinvestmentandeconomicgrowthintheprovinces/cities.Vietnamintheperiod2007-

2014usingtheP V A R m o d e l F r o m t h e r e s u l t s o f t h e a n a l y s

i s , t h e s t u d y p r o v i d e s p o l i c y recommendationsforeachoftheseinvestmentsaswellasacombinationofthesetypesof investmentsinawaythatcansustainandpromotelocaleconomicgrowthinVietnam

Theoutlineofthispaperisthefollowing.Section2 summarizesthesurveyofthe literature.Section3containsanoverviewoftheeconometricmethodologyandabriefd i sc u s s io n ofthedata.Section4discussestheempiricalresults.Finally,Section5givessomeconclusionsandpolicyimplications

2 LiteratureReview

2.1 TheoreticalStudies

Inthehistoryofdevelopingcountriesandingeneraltheories,anycountrymustusethem o s t i n t e r n a l r e s o u r c e s t o d e v e l o p t h e e c

o n o m y B y u s i n g t h e e ff e c t i v e d o m e s t i c capital

toenhanceitsroleandachievethecountry'simportantgoals.Domesticcapitalisadecisivesource,andforeigncapitalisanimportantadditionalsourceofinitialdevelopment.T h i s i s r e fl e c t e d i n t h e r o l e

o f a d d i t i o n a l f u n d s f o r i n v e s t m e n t a s t h e internalaccumulationoftheeconomyislow.Theroleofdomesticcapitalinanycountryisundeniable,butwithglobalizationinthenewera,foreigncapitalplaysanimportantroleinpromotingeconomicdevelopment Ofanycountry,especiallyunderdeveloped, developingc o u n t r i e s , o

f w h i c h F D I i s t h e d o m i n a n t ( a p a r t f r o m o ffi c i a l d e v e l o p m e n

t assistance(ODA))

Int h e e a r l y 1 9 8 0 s , researcheso n t h e d e t e r m i n a n t s o f e c o n

o m i c g r o w t h a t t r a c t e d n e w interestamongeconomists.Inparticular,therelationshipbetweenFDIandeconomicg r o w t h i s a

t o p i c s t u d i e d i n d e v e l o p e d e c o n o m i e s , b o t h t h e o r e t i

c a l l y andempirically.T h e t h e o r y o f e n d o g e n o u s g r o w t h( R o m e r ( 1 9 8 6 ) , L u c a s ( 1 9 8 8 ) , B a r r o (1991),Mankiw,RomerandWeil(1992),BarroandSala-i-

Martin(2004)confirmsthatFDIpromoteslong-termeconomicgrowthbytechnologicaldiffusion.Thistheoryformsth

e b a s i s o f l a t e r s t u d i e s t o i d e n t i f y t h e m a j o r f a c t o r s e x p

l a i n i n g t h e d i ff e r e n c e s i n economicgrowthamongnations.Ontheotherhand,theEclectictheoryofFDI,developedbyDunning(1988),providesanotherwayofanalyzingtherelationshipbetweenFDIandeconomicgrowth.Basedont h e a n a l y s i s o f c o m p e t i t i v e a d v

a n t a g e , t h i s t h e o r y s h o w s t h a t t h e a t t r a c t i o n o f F D I dependsverymuchonthefactorsandcharacteristicsofthehostcountry.Althoughintheshorttermtherelationshipbetweeninvestmentandeconomicgrowthtendstobelo w,butinthelongrun, investmentratesarefoundto becloselylinkedtoeconomic growth.Onecountry,ifdomesticsavingsarenotenoughfordomesticfinancial investment,willdependonforeigncapital

Ins h o r t , d o m e s t i c c a p i t a l h a s a l w a y s b e e n a m a j o r s o

u r c e o f e c o n o m i c g r o w t h However,itcannotbedeniedthattheroleofforeigncapital,especiallyFDI,isalsoap o t e n t i a l s ourc eo

f ec onom ic growth for any c ountry, its role ine c onom ic growt

h It

shouldb e exploredindeptht h r o u g h e m p i r i c a l s t u d i e s I n a d d i

t i o n , t h e r e l a t i o n s h i p be twee nt h e s e t w o s o u r c e s o f c a p

i t a l i s a l s o a ffi r m e d a s c o m p l e m e n t a r y a n d complementaryrelationships,ineachperiodin whichtheyinteractatdifferentlevels,Thiseffectisalsonotthesameforeachcountrywithitsowneconomiccharacteristics

2.2 EmpiricalStudies

SumeiTa ng,E A S e l va na t ha n and S Se lva na tha n ( 20 08 ) u

s e d th e VAR a nd E CM regressionm o de l f o r qu a r te rl y t i m e s e r i e

s da t a f r o m t h e fi rs t q u a r t e r of 1 9 8 8 t o t he thirdquarterof2003toexamineshort-andlong-

termrelationshipsbetweenFDIandD I , andeconomicgrowthinChina.Inthecourseoftheexperiment,hefocusedontheGrangerc a

u s a l r e l a t i o n s h i p b e t w e e n t h e v a r i a b l e s a n d t h e f u n c

t i o n o f t h e i m p u l s e responsefunction.TheresultsshowthatinsteadofoverridingDI,FDIhasanadditionalre la tionship f o r D I F D I n o t

o n l y h e l p s i n o v e r c o m i n g t h e s h o r t a g e o f c a p i t a l , i t a l s o stimulatese c o n o m i c g r o w t h t h r o u g h t h e a d d i t i o n o f D I c a p i t

a l i n C h i n a C h i n a ' s D I capitala n d e c o n o m i c g r o w t h a r e p o

s i t i v e l y c o r r e l a t e d ; L a r g e e c o n o m i c g r o w t h encourageslargedomesticinvestmentandviceversa.China'sDIandeconomicgrowthhavenothadasignificantimpactonFDIinflowsoverthelongterm.ThecausalrelationshipbetweeneconomicgrowthandDIistwo-way,butthereisonlyonecausald i m e n s i o n fromFDItoDIandFDItoeconomicgrowth.China'sDIhasagreaterimpactone c o n o m i c g r o w

t h t h a n t h e i m p a c t o f F D I o n s t i m u l a t i n g e c o n o m i c g r o

w t h a n d promotingdomesticsavingsshouldbeprioritizedoverFDIattractioninthedesignandim plem enta tion ofthewar.InvestmentstrategyandinvestmentpoliciesinChina

SamuelAdams(2009)usedpaneldatafor42sub-SaharanAfricancountriesbetween1990a n d 2 0 0 3 t o a n a l y z e t h

e i m p a c t o f F D I , D I o n e c o n o m i c g r o w t h B y t h e O L S regressionmethod,thestudyshowsthatFDIinthelatterperiodhasapositiveimpactoneconomicgrowth,butthecurrentFDIdoesnothaveapositiveimpactoneconomicgrowth.Thisresultisexplainedbythelowlevelofdevelopmentinsub-

SaharanAfrica,l e s s d e v e l o p e d e c o n o m i e s t h a t f a v o r F D I , b

u t t h r o u g h O L S a n d F E M r e g r e s s i o n , t h e studyhasalsobeenshownthatDIhasapositiveandsignificantcorrelationfore c o n o m i c growth.Inaddition,thestudyresultsalsoshowatrendthatFDIisinverselyproportionaltoDI

HoiHoiLeanandBeeWahTan(2011)withannualtimeseriesfrom1970to2009studytherelationshipbetweenFDI,DIandeconomicgrowthinMalaysia.Youusethe

VARandVECMmodelstostudytherelationshipofeconomicvariablesintheshortandlongrun.First, the yusedtheVARmodel,verifiedtheco-

alignmentrelationship,and thencontinuedusingtheVECMmodeltostudytherelationshipofeconomicvariablesinthel o n g r u n T h e e m p i r

i c a l r e s u l t s o f t h i s s t u d y indicatethatF D I , DIa n d

long-terme c o n o m i c

growthhavealong-termrelationship.FDIhasapositiveimpactoneconomicgro wt h, wh

e reas DIha sanega tive im pa c t one conomicgrowth.Inthe lo

ng te rm In particular,theresultsofthestudyalsoshowacausalrelationshipbetweenDIandFDI,b e t w e e n economicgrowthandFDIintheshortterm.Inaddition,theincreaseofFDI willhaveapositiveimpactonDI,resultinginadditionaleffectsfrom FDIonDI.Higheconomicgrowthwillattrac tFDIfl ows in Malaysia.DIis alsoani

m portantfac torin at tra cti ng foreigninvestmentintheshortterm.ExpandingFDIinflowsmaybelinkedtoanastonishingincreaseinDI,andbothFDIandD I businessescanworktogethertof u r t h e r thegrowthofMalaysia

RehmatU l l a h A w a n , K h a l i d J a v e d a n d F a l a k S h e r ( 2 0 1

2 ) s t u d y t h e r e l a t i o n s h i p betweenF D I , e c o n o m i c g r o w t h ,

e x p o r t s , i m p o r t s , D I i n t u r n i n S o u t h A s i a i n c l u d i n g Bangladesh,India,PakistanandSriLanka,Usingtheannualtimeseriesdatafrom1973to2010.ThepaperusestheVARmodelandfocusesprimarilyoncausalrelationshipsbetweenF D I v a r i a b l e s , e c o n o m

i c g r o w t h , e x p o r t s , i m p o r t s D I , r e p r e s e n t e d b y fi x e d capitalformationandadditionalcommercialopenness(withtradeopenings=(exports

+imports)/

GDP).TheresultsofthestudyshowthatFDIhasanimpactoneconomicgrowthbutthiseffectisweakerthan theimpactofexportsoneconomicgrowth.Thepaperalsoshowsthatotherresultssuchaseconomicgrowthaffectimportsindifferentperiodsbutthereisnoreverserelationshipofimportstoeconomicgrowth.Similarly,economicgrowthaffects tradeopennessbutthereisnoreversaloftradeopennesstoeconomicgrowth.Thereisa ls o a two-

wayrelationshipbetweenFDIandtra de o p e n n e s s

TranNguyenNgocAnhThu(2014)focusedontheimpactofpublicinvestmentoneconomicgrowthinVietnamusingtheARDL techniquefor1988-

2012.Theresultsoft h e s t u d y s h o w t h a t t h e r e i s n o e v i d e n c e o

f t h i s e ff e c t i n t h e s h o r t t e r m b u t p u b l i c investmenthastheeffectofpromoting long-

termgrowth, although thisisthelowestco mp ar ed toprivateandcapitalinvestment.PrivatedirectforeignInaddition,thestudybyN g u

y e n H o n g H a ( 2 0 1 5 ) o n t h e i m p a c t o f F D I o n e c o n o m i c g r o

w t h i n T r a V i n h provincefor datafor the period 1999 to2013 us i

ng VAR tec hnique s a ndre la tions hip

ICUEH2017

testingC a u s e a n d e ff e c t , t h e studyr e s u l t s showt h a t t h e a t t r a

c t i o n o ff o r e i g n directinvestmenthasanimpactoneconomicgrowthinTraVinhprovinceandviceversa

v a r i a b l e s s u c h as labor force, privateinvestment, FDI haveapositive

impactoneconomicgrowth,meanwhile,theopennessoftheeconomy,inflationistheopposite.Basedonthefindingsofthestudy,theauthoralsoprovidedsomelessonsforVietnamtoimprovetheimpactofpublicexpenditureoneconomicgrowth

t r e s u l t s f o r e a c h c o u n t r y , group,o r region.T h e results s h o w t

h a t t h e r e l a t i o n s h i p b e t w e e n i n v e s t m e n t c a p i t a l a n d e c o

n o m i c g r o w t h remainsu n c l e a r O n t h e b a s i s o f i n h e r i t i n g

p r e v i o u s r e s e a r c h , a s w e l l a s e x t e n s i v e research,theimplementationofaresearchprojectonthesamesubjectinaVietnameselocaleh a s a n i m p o r t a n t r o l e t o p l a y T o h e l p p o l i c y m a k

e r s h a v e a p r a g m a t i c a n d generalviewoftheirlocalsituationinordertomakerecommendationsandimplementeffectivelythecompetitiveness,sustainableeconomicdevelopment ofthelocality,closeco nt r ib ut io n andoveralldevelopmentofthewholeeconomyinthecountry

3 MethodandData

Thism e thod us e d in th is re s e a rc hi s Pa ne l Ve c t or Autoregression(PVAR).Bythiswa y , thePanelVAR(PVAR)techniquecombinesthetraditionalVARapproachtreatinga l l v a r i a b l e s o f t h e s y s t e m a

s e n d o g e n o u s w i t h e s t i m a t i o n t e c h n i q u e s f o r p a n e l d a t a , w

PhamDinhLong&LeNguyenQuynhPhuon g|9

hichallowsforunobservedheterogeneitywhiletheuseofVARmodelsintimeseries

analysis isa commonstandard.PVAR isoneof

p r e s e n t s t h e F o r e c a s t ErrorVarianceDecompositions(FEVDs),whichshowsthepercentofthevariationinonevariablethatisexplainedbytheshocktoanothervariable,accumulatedo v e r time.Thevariancedecompositionsshowthemagnitudeofthetotaleffect

RealGDPrepresente dfore c o n o m i c gro wth

GI

Investmentfromgovern mentse c tor

+ PublicInvestment

PublicInvestmentratein GDP

PI Investmentfromprivatesector + PrivateInvestment

Investmentrateofn on-

s t a t e sectorinGD P

FDI ForeignDirectInvestment + Proportionofinvestment

capitalfromforeigndir ecti n v e s t m e n t se

ctortoGDP

Controlvariables

LABOR

Employeesaged15yea rsanda b o v e intheWor kforce

+

Annualratesoflaborfo rceg r o w t h

LaborForce TO

Totalvalueofexportan

di m p o r t ofgoodsint hearea

+

Volumeofexports andi m p o r t s ofg oodsandse r v i c e s

Exportt u r n o v e r toGD P

TotalImport-PhamDinhLong&LeNguyenQuynhPhuon g|453

Thisp a p e r u s e s s e c o n d a r y d a t a f r o m 6 3 p r o v i n c e s a n d c

i t i e s i n V i e t n a m f o r t h e periodof08yearsfrom2007to2014,sotherewillbeatotalof504observations

Datafromthefollowingsources:

-Grossdomesticproduct(GDP)ofprovincesandcitiesintheperiod2007-

2014istakenaccordingtotheactualvalue,measuredinVNDbillionatthefixedpricein2010takenfromtheVietnameconomic-

thesocialstatisticalyearbookof63provincesandcities,providedbytheGeneralStatisticsOfficeofVietnam

- Theexportandimportvalueofgoodsinthearea(unit:theUS$thousand)takenf r o m thestatisticalyearbookoftheGeneralStatisticsOffice.Then,tradeopennessdataiscalculatedfromthissource.

Ther e s e a r c h d a t a o f t h e t o p i c i s t a k e n f r o m t h e r e l i a b l e s

o u r c e s a v a i l a b l e i n t h e provincialstatisticalyearbookandtheGeneralStatisticsOfficeo f Vietnam.Butforp r o v i n c i a l G D P fi g u r e s ,

s o m e e s t i m a t e s t e n d t o behigherthanGDPfiguresf o r thewholecountry.ThisisarestrictionontheGDPfiguresofprovincesandcitiesinthist o p i c H o w e v e r , t h i s t o p i c doesn o t t a k e i n t o a c c o u n t t

h e overallGDPo f t h e wholecountry butonlytoassesstheimpactofpublicinvestmentontheGDPofprovincesandcities.Therefore,itistemporarilyacceptableaccordingtotheGDPdataavailablefrom theprovincialstatisticalyearbookforanalysis

Whereas,thet i m e s e r i e s d a t a b a s e s a r e o f t e n n o t o n l y v e

r y l a r g e v a l u e s b u t a l s o differentones,mostvariablesusedinthismodelaregotLogarithmfromtheirvalues e xce pt tradeopenness.Moreover,thegettinglogarithmalsohelpstoeliminatethelineart r

e n d fordata

4 Result

4.1 UnitrootTest

First,liketheVARmodel,whenestimatingthePVARmodel,itisnecessarytoensurestationarityofalltimeseriesvariables.AcommonlyusedtestvalidinlargesamplesistheaugmentedDickey–

s t i m a t i o n , w e b a s e o n J s t a t i s t i c a n d